In order to manage investment risks, an investor typically attempts to build a diversified portfolio that includes a blend of low risk investments having low yields, and high risk investments having higher potential yields. However, this approach does not provide an investor with an easy solution for balancing long term goals for investment growth with short or intermediate term needs for access to invested funds.
This issue is of particular importance to large institutional investors such as pension fund trustees. Pension fund trustees have a fiduciary responsibility to invest monies contributed to the fund so as to generate sufficient returns while meeting pension obligations to retirees. Fund trustees also have an overriding responsibility to preserve the principal of employees' investments. This responsibility can expose fund trustees and fiduciaries to personal liability for imprudent management of fund assets.
Typically, pension funds manage their investments toward an established actuarial return, which represents the return necessary to meet the payout obligations of each plan over time. During the past several years there has been significant growth in the dollar values of pension fund portfolios. These gains are principally attributed to earlier changes in regulation and, more dramatically, to the numbers of people participating in retirement plans as well as the economic boom of the past decade. Therefore, there is a growing need for investment strategies that provide long-term growth along with manageable security of principal.
Over the last several years, many fund managers have increased their asset allocation in public equities in an effort to gamer increased yields. Increased equity price expectations, combined with the absence of inflation and a low interest rate environment, helped fuel rising public and private equity markets during this period. However, this strategy did not work well after the second quarter of the year 2000.
A substantial decline of the equity markets after the second quarter of 2000 compelled most fund managers to reevaluate their respective asset allocations. While inflation has not been a threatening factor, the continuing lower interest rate environment, coupled with the likelihood of further rate declines, have left few opportunities to obtain yields in the public and private equity markets that would make up for losses incurred to this point. There is therefore a need in the art for investment methods and systems that enable fiduciaries to meet their underlying responsibility for preserving principal while obtaining higher targeted yields historically associated with equity investments throughout a multi-year span of an investment period.